Question

1. Visualizing the factor-endowment theory Consider the two hypothetical nations of Golikia and Ferville. Suppose they both produce only two goods, robot vacuum cleaners and catnip toys. Each country faces a trade-off when producing the two goods. The following graph displays the respective production possibilities frontiers (PPF) for Golikia and Ferville. 20 18 olikias PPF Terms of Trade 16 14 12 t0 10 Fervilles PPF 0 4 6 8 0 12 14 16 18 20 ROBOT VACUUM CLEANERS (Thousands)If the two nations operate in autarky, which of the black points (plus symbol) are attainable for Ferville? Check all that apply. O Point A PointB Point Point D Suppose the two nations decide to trade with each other at a rate of one robot vacuum cleaner per catnip toy (1:1 On the previous graph, use the green line (triangle symbol) to represent the terms of trade to help you find your answer to the following question. You will not be graded on where you place the line on the graph. Which of the grey points (star symbol) that were not attainable by either country in autarky are attainable once the countries agree to trade, holding all else constant? Check all that apply Point w O Point X Point Y Point Z Suppose Ferville and Golikia engage in trade, and both nations desire the same post-trade consumption bundle. (Note: Assume both countries will not waste any resources.) Golikia wil robot vacuum cleaners

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Answer #1

Sol:-

A) In Autarky,a nation can only achieve those points which lie on it's PPF curve or those points which lie inside it.

For Golikia,the points attainable are :

A and B

b) When both nations decides to trade,the new world ppf curve will cover the following grey points under the curve which will become attainabe now-

Points X,Y and Z

c) When both nations engage in trade and desire the sasme post trade consumption bundle then Golikia will export video game consoles as it has a lower opportunity cost in production of video game consoles.

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